Canada may supply one-third of Gulf Coast heavy oil by 2020

Canada Oil

Supplies of Canadian oil sands heavy crude are increasingly being refined on the U.S. Gulf Coast and could top 1.2 million barrels per day -- a full one-third of the region's heavy oil refining market -- by 2020, says a new report by IHS Markit. Current runs of Canadian crude in the Gulf Coast market are estimated to already be in excess of 800,000 barrels per day.

Titled "Looking South: A Canadian Perspective on the U.S. Gulf Coast Heavy Oil Market," the Oil Sands Dialogue report says the increasing volumes into the Gulf Coast refining market are coming at an opportune time for both nations. Imports from Canada have exceeded demand in their traditional import market -- the U.S. Midwest -- where they have joined renewed U.S. domestic light oil to collectively displace nearly all other imports.

The Gulf Coast is home to the world's highest concentration of heavy oil refineries, and more than 90 percent of the heavy oil supplied to them comes from imports. But supplies from some traditional sources of these imports are waning. This is increasing the need for Canadian heavy crude oil of similar quality, the report says.

"The U.S. Gulf Coast is the most logistically approximate and technically suited to receive increasing volumes of heavy oil from Canada," said Kevin Birn, executive director, IHS Markit, who heads the Oil Sands Dialogue. "With supply overtaking demand in the U.S. Midwest and traditional sources of offshore heavy supply to the Gulf Coast in decline, Canadian supply has become an obvious and attractive alternative."

Increased volume in the Gulf Coast market would raise Canada's already sizeable reliance on the U.S. oil market, however. And while the U.S. provides security of demand for Canada, there are risks of overreliance.

The IHS Markit forecast assumes the completion of all the country's remaining long-distance export pipelines. If those projects were delayed or Canadian or other heavy oil supply is more prolific than anticipated, Canada may have to compete more aggressively for market share in the U.S. -- something it has not yet had to do.

"Although Canadian imports are of similar quality as Latin American crudes, they are not identical. There is a point when more extensive modifications will be required to better tailor facilities to accommodate greater volumes of the Canadian heavy crude," said Birn. "In a situation where the level of competition is high, Canadian crude may have to adjust price to incentivize refiners to make additional modifications and/or displace greater quantities of offshore imports."

Alternative diversification strategies -- such as customizing oil sands blends or developing upstream partial processing technologies that would result in the marketing of a greater range of crude oil qualities -- can help mitigate the risks. However, given the scale of Canadian heavy oil supply today and anticipated growth, these solutions would not remove the risk and would still take considerable investment and time, the report concludes.

"The reality is that Canada -- the fifth-largest oil producer in the world -- maintains an almost singular reliance on one market," Birn said. "Such a situation is unique in the world and will always carry associated concerns."